Norske Skog ASA

OSE:NSKOG

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Geir Drangsland, executive]

Good morning, and welcome to the third quarter 2023 presentation for Norske Skog. Briefly on strategy. Norske Skog will continue to optimize cash flows from publication paper and ramp up to become a leading independent container producer. At the same time, we will explore new revenue streams from fiber processing with a particular focus on the Nordics. We have a strong financial position to pursue this strategy with more than NOK 3 billion of liquidity and remaining net investments just below NOK 1 billion.

Here, third quarter in brief. Earnings negatively impacted by weak markets. EBITDA in the quarter of NOK 327 million, including property damage insurance of NOK 67 million, reimbursement of power payments of NOK 77 million, and negative impact of NOK 55 million related to change in CO2 compensation scheme.

Paper and containerboard prices leveling out. Publication paper markets weak. Further capacity closures needed. Signs of containerboard demand stabilizing, but markets still characterized by excess capacity. Bruck (PM3) ramp-up on plan in challenging markets. Production and product quality at Bruck (PM3) in line with plan. Expect full utilization in second quarter 2025.

Golbey (PM1) progressing towards start-up in quarter 2 2024. Preparations for restart of Skog Bruck's paper machine 5. Paper machine 6 likely closed through first quarter 2024. Full extent of damages yet to be determined. The mill is insured for property damages and business interruptions for up to 18 months.

Share repurchase program. 6.5 million shares repurchased as of 30th of September 2023 at a total consideration of NOK 285 million. Repurchase program likely to be completed by early November. Here is a snapshot of some key financials. Revenue was down in the quarter, mainly due to lower selling prices. EBITDA was also slightly down for the same reason, but we maintained healthy margins.

Operating cash flow are still positive, even in very challenging markets. Net debt increased, as mentioned on the previous slide, mainly due to investments and repurchase of shares.

Looking at the segments. Publication Paper margins in Europe remain at healthy levels, well above our mid-cycle target of 10%. This is, of course, also impacted by insurance in the quarter. Publication Paper in Australia is finally back to delivering positive EBITDA following price increases. We expect this to continue and perhaps even improve somewhat. Packaging Paper is still EBITDA negative as we are ramping up.

However, margins have improved from roughly minus 50% to 25%. So we are on the right track, even in a very challenging market. Fiber and energy prices continue to fluctuate. Energy is still at high levels, although down from the peaks seen in 2022. We are well-positioned with long-term electricity contracts and internal thermal energy production, covering almost all our needs.

We are benefiting from currently lower recycled paper prices and managing the very high pulp prices. We see some early signs of pulpwood prices easing. The publication paper market balance is very weak with industry utilization rates around 70%. Newsprint is still better than magazine grades, but all markets need closures. Around 1.5 million tonnes has been announced close towards year-end, but we expect around twice that amount is required to balance the market.

Norske Skog has a very competitive production cost across most mills and thus, we are able to manage even in this challenging market. Publication paper prices have continued to fall from the end of 2022 until now, although recently development has been more stable, perhaps indicating that we are near the marginal cost of production. CO2 prices have remained high, which still benefits us through the CO2 allowances and CO2 compensation.

Containerboard prices. This market is very challenging and prices are at very low levels. The RISI gross price is not representative of where transactions are occurring in the market. The net market price is already at trough levels, and we see limited room for the net market price to move lower given the current energy environment.

At Bruck paper machine 3, we continue to ramp up production and to reduce production cost as a consequence. From quarter 2 to quarter 3, costs per tonne were down 46%, and this will continue to fall as we ramp up to 95% utilization. And I am proud and pleased on how the management team is progressing with the ramp-up of the containerboard production at Bruck.

As mentioned, Bruck is ramping up. At Golbey, we are moving towards start-up end of second quarter '24, another milestone for our entry into packaging solutions.

At Saugbrugs, there is a significant effort from all stakeholders to secure rock formations, clear debris, evaluate damages, and much more. This is highly appreciated and important for us. We have a good dialogue with the insurance company and recognize further insurance compensation and payments in the quarter. We will update you on the situation as it progresses.

Outlook. Raw material and energy costs stabilizing, but development remains uncertain. Paper prices are influenced by lower input costs and weak market balance. Containerboard prices stabilizing, but still a challenging market. Further capacity closures and industry consolidation required in all markets. Expect negative EBITDA from Packaging solutions segment in 2023 as production ramps up, maintaining a healthy balance sheet, strong liquidity position and low production cost.

Capital Markets Day at Hotel Continental in Oslo, 16th of November from 9 until 12. You're all welcome. Thank you.